The Irish Experience – an apologyMake Text Bigger
We at Property118 have often pointed out that the Irish government disallowed finance costs between April 1998 and December 2001, and the average rent rose by almost 50% from 600 Euros to almost 900 Euros.
We inadvertently gave the impression that this measure affected existing loans, and was retroactive. Having found the TAX BRIEFING from the Office of the Chief Inspector of Taxes Issue 32 – June 1998, we now realise that this was incorrect.
INTEREST ON EXISTING LOANS WAS UNAFFECTED. INTEREST ON NEW LOANS FOR IMPROVEMENTS OR REPAIRS TO EXISTING PROPERTIES WAS UNAFFECTED.
Page 35 explained that it only affected “interest on borrowed money used on or after 23 April 1998, in the purchase, improvement or repair of a residential premises”.
Transitional arrangements even extended the deductibility of interest to loans taken out on or before the 31 December 1998 for the purchase or construction of residential premises under certain circumstances.
The measure did not apply to loans taken out, at any time, for improvements or repairs to property that had been a rented residential property at any time in the 12 months to 23 April 1998.
In other words, the measure only applied to new purchases or new construction. It merely deterred people from buying or building to let, it did not bankrupt them. It stopped the supply of rented accommodation increasing, and this was enough to make the average rent go up by almost 50%. The measure was repealed as of 1 January 2002.
Section 24 has already had a similar effect in the UK, before it has even come into force. Home providers have stopped financing new developments, stopped re-habilitating run-down buildings and stopped converting large buildings into HMOs.
So the Irish experience between 1998 and 2001 is no guide to what will happen to the supply of rented accommodation in the UK when home providers realise that their tax might exceed their rental profit, or that they have to pay tax on a loss. All we can say is that it will be incalculably worse than it was in Ireland around the turn of the millennium.
The Irish Government did introduce a retroactive measure in April 2009 when it disallowed 25% of interest. This is explained in [4.8.6] Deductibility of Loan Interest (section 97(2)(e)).
This is milder than what S 24 will be doing by 2020/21. For example, someone whose income of £65,000 comes entirely from rental property would pay tax at 48% under the current Irish rules, rather than at 83% under S 24.
Even this milder approach caused such a shortage of accommodation in Ireland for tenants in receipt of certain social housing supports that the law was changed with effect from the start of 2016 to exempt home providers who will take such tenants.
S 24 will be more draconian, and again it has already had a similar effect here to that in Ireland. Many home providers in the UK have had to increase rents in anticipation of the extra tax they will have to pay, which meant evicting those on capped benefits who cannot afford them. Other providers have decided not to take tenants on benefits in future.
How much damage will Osborne’s lunatic tax be allowed to cause in this country before it is repealed?
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